FTC Staff Comment to the Office of Corporation Counsel, District of Columbia Concerning Bill 13-333, the Physicians Negotiation Act of 1999"

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
BUREAU OF COMPETITION
WASHINGTON D.C. 20589
Richard A. Feinstein
Assistant Director
Direct Dial
(202) 326-3688
October 29, 1999
Robert R. Rigsby
Interim Corporation Counsel
Office of the Corporation Counsel
Government of the District of Columbia
441 Fourth Street, N.W., Tenth Floor North
Washington, D.C. 20001
Re: Physicians Negotiation Act of 1999
Dear Mr. Rigsby:
This letter is a response to your request for comment by Federal Trade Commission staff on the
"Physicians Negotiation Act of 1999," Bill No. 13-333 in the District of Columbia Council. This
bill is intended to permit competing physicians to engage in collective bargaining with health
plans. As is discussed below, the Commission has opposed enactment of a bill currently before
Congress, H.R. 1304, that would create an antitrust exemption for collective negotiations
between health care providers and health plans. Such an exemption, the Commission stated, will
not ensure better care for patients, and threatens to raise health care costs and reduce access to
care. In my view, the District of Columbia proposal raises similar concerns.
In addition, it is doubtful that the D.C. bill in its current form would immunize physicians from
liability for conduct that violates the federal antitrust laws. State economic regulation can
immunize private parties from federal antitrust liability, but only where it satisfies the
requirements of the "state action" doctrine. It is unclear whether enactments of the District of
Columbia Council would be treated as equivalent to statutes of a state legislature for purposes of
the state action doctrine. Moreover, even assuming the Council has the ability to confer state
action immunity, the level of governmental involvement called for in the bill falls far short of the
"active state supervision" that the Supreme Court has required to displace federal antitrust law.

Background
Antitrust law already allows doctors to collectively negotiate with health plans in various
circumstances in which consumers are likely to benefit. The Federal Trade Commission and the
Department of Justice have issued health care policy statements that emphasize physicians'
ability under the antitrust laws to organize networks and other joint arrangements to deal
collectively with health plans and other purchasers.(1) In addition, health care professionals can,
through their professional societies and other groups, jointly provide information and express
opinions to health plans.(2) Legislative proposals to permit collective bargaining by health care
professionals, however, such as the one pending in the District of Columbia, seek to authorize
conduct that would otherwise constitute unlawful price fixing or other serious antitrust
violations.
The Commission's June 1999 testimony on H.R. 1304 before the House Judiciary Committee
explains its opposition to creating an antitrust exemption to allow otherwise unlawful collective
bargaining by competing health care providers. The Commission's belief that such an exemption
could cause serious harm -- to consumers, employers who provide health care coverage for
employees, and to federal, state, and local governments -- is based on its experience investigating
the effects of numerous instances of collective bargaining by competing health care providers.
For example, the Commission, after a joint investigation with the Commonwealth of Virginia,
issued a consent order settling charges that a group of physicians in Danville, Virginia, agreed on
reimbursement rates and other terms of dealing with health plans, and agreed not to deal with
plans that did not meet those terms.(3) The Commonwealth of Virginia collected $170,000 in
damages and penalties for the increased costs the state was forced to bear in providing health
care benefits to its employees as a result of the physician group's conduct.(4) Likewise, the
Commission took enforcement action against collective fee demands by pharmacists in the State
of New York that cost the state an estimated $7 million in increased health benefits costs for
state employees.(5)
Without antitrust enforcement to block such price fixing, the Commission stated, "we can expect
prices for health care services to rise substantially." Raising health care costs and making health
insurance less affordable, the testimony observed, threatens to increase the already substantial
uninsured population, and thereby reduce access to health care services. In addition, the
Commission noted that the exemption could also allow physicians to collectively demand terms
from health plans that would make it difficult for consumers to choose to obtain services from
allied health care providers, such as nurse-midwives.
The Commission emphasized that immunizing collective bargaining would impose costs without
any guarantee that patients' interests in quality care would be served:
Collective bargaining rights are designed to raise the incomes and improve working conditions
of union members. The law protects the United Auto Workers' right to bargain for higher wages
and better working conditions, but we do not rely on the UAW to bargain for safer cars.
Congress addressed those concerns in other ways.(6)

The Commission's testimony also pointed out that other approaches to improve quality and
protect consumers have been proposed that would not sacrifice the benefits of competition by
granting collective bargaining rights to health care professionals, and briefly described some of
those proposals. A copy of the testimony (Attachment A) is enclosed for your information.
I am also enclosing a copy of a letter from FTC staff discussing a collective bargaining bill in
Texas (Attachment B). The letter notes that the Texas bill, while different in certain respects
from the federal proposal, still carries substantial potential for consumer harm.
The District of Columbia Bill
The District of Columbia bill closely follows model state legislation on physician collective
negotiations developed by the American Medical Association. In fact, the bill appears to adopt
all of the provisions of the AMA model except Section 1, which is a declaration of legislative
purpose. I will first discuss a few issues regarding the scope of conduct the bill seeks to
authorize, and then analyze the question whether the bill would be effective in creating immunity
from federal antitrust law for private parties acting pursuant to its provisions.
The Scope of Permitted Conduct
The collective bargaining permitted by the bill is subject to certain limitations not present in the
federal proposal, but these limitations are ambiguous in some important respects. As a result, it is
difficult to ascertain the precise scope of conduct that the bill would seek to authorize. In any
event, however, the two primary ways that the bill limits collective bargaining -- the market
share limitations and the ban on boycotts -- appear to leave consumers at risk of substantial
harm.
First, the bill's reach depends in part on market shares of health plans and, to a lesser extent,
physician groups. It authorizes collective negotiation with health plans, but negotiation over
certain price-related terms is limited to situations in which the health plan has "substantial
market power," which, under the bill's terms, exists when a health plan's market share exceeds
15%. In addition, under section 5(f), where a health plan has less than a 5% market share, the
physician group may not exceed 30% of physicians (or of a particular physician type or
specialty) in the health plan service area.
Although the bill appears to make the concept of market power an important limitation on some
forms of collective bargaining, it is unclear how market shares are to be delineated or applied.
According to the bill, substantial market power exists if the health plan has a 15% share of any of
the following: (1) the number of covered lives as reported by the insurance commissioner; (2) the
actual number of consumers of prepaid comprehensive health services; or (3) a particular
"market segment," to wit: "Medicare, Medicaid, or commercial, managed care and health
maintenance organization." Although category (1) appears straightforward, it is unclear to us
what is intended by the other two categories. Moreover, it is not clear what geographic area
would be used to calculate market shares, at least with respect to categories (2) and (3), or which
payers are to be included in the market share calculations.

Aside from the ambiguity, however, the bill's provisions are not based on accepted concepts of
market power in a legal or economic sense. Market power is, simply put, the power to raise
prices above competitive levels, or in the case of buyers, the ability to reduce prices below
competitive levels. Market share can indicate market power, but only if based upon a properly
defined market. Even if the bill's categories correctly identified relevant markets, a 15% market
share (let alone a share above 5%) is not a level ordinarily presumed to constitute market
power.(7) In addition, the bill does not take into account ease of entry in assessing market power,
as antitrust analysis ordinarily would.
The limitation on the "market share" of physician groups negotiating with small health plans
(which sets a higher threshold for physician market power than for health plan market power)
also does not reflect market power, and may understate the economic clout of a physician group.
The 30% share limitation is based on the portion of physicians "in the health plan service area or
proposed service area." There is no reason, however, to expect that a health plan service area
would necessarily represent an appropriate geographic market for the physician services in
question. Indeed, geographic markets for physician services may vary by specialty. A health plan
service area could well be broader that the geographic market for physician services, with the
result that the 30% cap would not prevent aggregation of physicians with substantial market
power within the service area negotiating with very small health plans.
The other major limitation in the bill, section 2(b), which provides that "Nothing herein shall be
construed to allow a boycott," also raises significant questions of interpretation and may not offer
significant protection to consumers. First, its wording and placement could be read to suggest
that the limitation applies only to the conduct authorized in Section 2, rather than the entire bill.
If that were the case, other sections of the bill could permit physicians to engage in boycotts.
Second, the term "boycott" has been subject to varying interpretations, in some cases being
understood as collective refusals to deal to force a party to accept terms, and in others limited to
refusals to deal with third parties to pressure another party with whom the group has a dispute.(8)
It is unclear whether the bill is intended to bar agreements not to deal with health plans except on
collectively-determined terms, or whether it would only prohibit agreements to withhold services
from third parties (patients or others), in order to pressure health plans to accede to the contract
terms demanded by the physician group.
The federal collective bargaining bill excludes from its authorization "collective cessation of
services to patients" (i.e., boycotts in the narrow sense), and the Commission in its testimony
(p.8) observed that "this limitation takes virtually nothing away from the coercive power the bill
grants to providers." Furthermore, as the testimony explains, a collective refusal to contract, if it
did not force the health plan to capitulate to physician demands for fee increases, could result in
patients' having to pay medical bills out of their own pockets, and thus would impose formidable
obstacles to patients seeking care.
Even if it were clear that the D.C. bill would not protect physicians' concerted refusals to deal
with health plans, however, its authorization of collective bargaining would still present a serious
risk of anticompetitive harm. As the Commission has previously observed, collective
negotiations by their very nature can convey an implicit threat that if the health plan does not
agree to terms acceptable to the physician group, the plan will be unable to obtain agreements

with group members.(9) By immunizing, and thereby encouraging, agreements among
physicians on the prices and other terms they will accept from health plans, the bill would
facilitate coordinated conduct among physicians, such as collusive refusals to deal that, even
though not immune, would be difficult to detect and prosecute. I would also note that the
analysis that accompanies the AMA model legislation makes it clear that the bill's purpose is to
allow physicians to exert "leverage" over payers in order to obtain more favorable terms. Thus,
excluding concerted refusals to contract from the bill's protections would not appear to eliminate
the coercive force of collective bargaining, or obviate concerns that the bill would increase the
likelihood of concerted refusals to contract.
I would also note that the analysis in the AMA model states that Section 2 allows physicians to
discuss managed care contract terms "free from the antitrust risk that normally accompanies such
collaborative activity." You may wish to advise Council members that the antitrust laws do not
prohibit the mere discussion of issues such as those enumerated in Section 2 unaccompanied by
agreements on the terms on which the physicians will deal.
Immunity Issues
Under the judicially-created "state action" doctrine, states may override the national policy
favoring competition and provide that aspects of their economies will be governed by state
regulation rather than market forces. States, however, may not simply authorize private parties to
violate the antitrust laws.(10) Instead, a state must substitute its own control for that of the
market. To that end, the state legislature must clearly articulate a policy to displace competition
with regulation, and state officials must actively supervise the private anticompetitive conduct.
See California Retail Liquor Dealers Assen v. Midcal Aluminum, Inc., 445 U.S. 92 (1980).
A threshold issue is whether the District of Columbia is equivalent to a state for purposes of the
state action doctrine, or otherwise has the ability under federal law to create antitrust immunity
for private parties. I am not aware of any controlling authority on the question, and I am not in a
position to offer an opinion.(11) It is, of course, a key question to be resolved, because if the
Council lacks authority to create antitrust immunity through adoption of a regulatory scheme,
physicians acting in reliance on the bill would be exposed to significant risk of antitrust liability.
Assuming, however, that the Council has the authority to create state action immunity, the
critical question is whether the bill establishes a scheme with sufficiently active state supervision
of private conduct to satisfy the second prong of the state action test. The bill's authorization of
collective bargaining appears to satisfy the requirement of a state policy to supplant competition.
But in order for state supervision to be adequate for state action purposes, state officials must
"have and exercise ultimate control over the challenged anticompetitive conduct." Patrick v.
Burget, 486 U.S. 94, 100 (1988). On this second requirement for immunity, the bill falls far
short.
Section 6 of the bill provides that the representative who will negotiate on behalf of physicians
must obtain approval from the Mayor to undertake negotiations. The Mayor is to withhold
approval if "the proposed negotiations would exceed the authority granted under this act."
Section 6(b). The Mayor is to make this determination within 30 days based on information

identifying the representative, its plans and procedures, and "a brief report" identifying the
proposed subject matter of the negotiations and the expected benefits to be achieved. In addition,
the representative must furnish for the Mayor's approval, prior to dissemination, a copy of "all
communications to be made to physicians related to negotiations, discussions, and health plan
offers." The bill does not grant the Mayor the power to review and disapprove contract terms or
other matters on the ground that they are unreasonable, unjust, or otherwise contrary to the
interests of consumers.
The Supreme Court has made it clear that the active supervision standard is a rigorous one,
designed to ensure that an anticompetitive act of a private party is shielded from antitrust liability
only when "the State has effectively made [the challenged] conduct its own." Patrick at 106. It is
not met where the reviewing state official does not evaluate the substantive merits of the private
action. Id. at 102-105. Thus, the Court has held that a state did not actively supervise price
arrangements when it did not establish the prices, review the reasonableness of prices, monitor
market conditions, or engage in any "pointed reexamination" of the program. Midcal, 445 U.S. at
105-106. Active supervision requires that the state exercise "sufficient independent judgment and
control so that the details of the rates or prices have been established as a product of deliberate
state intervention, not simply by agreement among private parties." Federal Trade Commission
v. Ticor Title Insurance Co., 504 U.S.621, 634-35 (1992).
The apparently limited nature of the Mayor's authority to review and approve the authorized
private conduct alone makes the bill on its face inadequate to establish active supervision. Other
aspects of the bill also raise questions as to the adequacy of supervision. For example, the limited
nature of information that a physician representative must provide to obtain approval would raise
questions as to the extent to which government officials have exercised "sufficient independent
judgment and control." Indeed, it is unclear that the Mayor would even have sufficient
information to determine whether the group's negotiations complied with the market share
limitations of the bill. In addition, the bill's failure to specify a standard against which the Mayor
would evaluate proposed collective bargaining activities further suggests that no substantive
review is contemplated.
Parties claiming immunity under the state action doctrine bear the burden of establishing that
they are entitled to such immunity. Thus, should the Council desire to go forward with a
collective bargaining bill, it will be important to ensure that the bill establishes a regulatory
scheme that meets the rigorous requirements that the Supreme Court has established. Otherwise,
physicians relying on the bill's provisions to provide antitrust immunity would risk exposure to
potentially significant financial liability for their actions.
* * *
I hope you find these comments helpful. The views expressed in this letter, of course, do not
necessarily represent the views of the Commission or any individual Commissioner. Should you
have any additional questions, feel free to contact me at 202-326-3688.
Sincerely,

Richard A. Feinstein
Assistant Director
Attachments
Endnotes
1. See Statements of Antitrust Enforcement Policy in Health Care, 4 Trade Reg. Rep. (CCH)
¶ 13,151 (August 1996) (available at www.ftc.gov/reports/hlth3s.pdf).
2. See, e.g., Schachar v. American Academy of Ophthalmology, 870 F.2d 397 (7th Cir. 1989);
Statements 4 & 5 of Statements of Antitrust Enforcement Policy in Health Care, supra note 1.
3. Physicians Group, Inc., 120 F.T.C. 567 (1995) (consent order).
4. Commonwealth of Virginia v. Physicians Group, Inc., 1995-2 Trade Cas. (CCH) ¶ 71,236
(W.D. Va. 1995) (consent decree).
5. See Peterson Drug Company, 115 F.T.C. 492, 540 (1992). See also Pharmaceutical Society of
the State of New York, Inc., 113 F.T.C. 661 (1990) (consent order).
6. Testimony of Federal Trade Commission before the House Judiciary Committee on H.R. 1304
(June 21, 1999) at 10.
7. See. e.g., Statement 8 of Statements of Antitrust Enforcement Policy in Health Care, supra
note 1 (establishing antitrust "safety zone" for physician network joint ventures that constitute 20
percent or less of the physicians in each physician specialty in the relevant geographic market)
8. See Hartford Fire Insurance Co. v. California, 509 U.S. 764 (1993). In Hartford, which
construed the meaning of the term "boycott" for purposes of the McCarran-Ferguson Act, Justice
Scalia, writing for the majority, distinguished between boycotts and "concerted agreements to
seek particular terms in particular transactions," which he termed "cartelization." Id. at 801-802.
A boycott, Justice Scalia wrote, is limited to a refusal to deal with a party in order to obtain an
objective collateral to the boycotters' relationship with that party. Id. at 801. He also pointed to a
distinction in labor law between a strike, i.e., a collective refusal to deal with an employer to
obtain better contract terms from that employer, and a boycott, involving a work stoppage
designed to put pressure on some other employer.
9. See Michigan State Medical Society, 101 F.T.C. 191, 296 n.32 (1983) ("the bargaining
process itself carries the implication of adverse consequences if a satisfactory agreement cannot
be obtained"); see also Preferred Physicians Inc., 110 F.T.C. 157, 160 (1988) (consent order)
(threat of adverse consequences inherent in collective negotiations)..
10. Parker v. Brown, 341 U.S. 351 (1943) ("a state does not give immunity to those who violate
the Sherman Act by authorizing them to violate it, or declaring that their action is lawful").

11. In American Telephone & Telegraph Co. v. Eastern Pay Phones, Inc.., 767 F. Supp. 1335
(E.D. Va. 1991), the court ruled that a regulatory scheme of the District of Columbia did not
provide state action immunity, without discussing whether the District stands on the same
footing as states with respect to the state action doctrine. An earlier case (arising prior to
Congress' grant to the District of home rule powers) involving the District of Columbia Armory
Board, a governmental entity, evaluated antitrust immunity claims with reference the Board's
federal enabling legislation. See Hecht v. Pro-Football, Inc., 444 F.2d 931 (D.C. Cir 1971).